Wall Street eyes 'Trump trade' as election draws nearer

Wall Street is re-calibrating its portfolio in anticipation of Donald Trump winning the U.S. election in November.

Despite ongoing legal troubles, data from PredictIt suggests the former president has a 56% chance of taking back the Oval Office—thanks to Biden's disastrous debate and abrupt decision to pull out of the race.

Although Vice President Kamala Harris is beginning to gain ground, the market begins to price in Trump's vision for the economy.

If re-elected, the former president pledged to slash corporate tax to 15% as well as aggressively hiking tariffs on all foreign-made goods, not just China's

As a result, hedge funds are increasingly snapping up American high-yield bonds in anticipation that Trump's policies will steepen the U.S. yield curve.

There's also been an uptick in demand for junk bonds, primarily because issuers tend to have a higher degree of revenues from the U.S.

That's good news because an increase in tariffs, when coupled with deregulation, may have the potential to benefit domestic manufacturers in particular.

Insight Investment's senior high-yield portfolio manager Catherine Braganza told Bloomberg, "We have been adding U.S. industrials that would benefit from a pro-business stance from a new government."

She went on to argue that companies in the industrial manufacturing space—namely those who deal with spare parts—are especially attractive.

Too early for the "Trump trade"?

Other analysts are sitting on the sidelines for now.

They argue that there are no guarantees that Trump will be re-elected, and it's difficult to assess what the economic fallout would be from his policies… as well as how long it would take to play out.

Deepwater Asset Management co-founder Gene Munster said Biden's exit from the race and Harris's resurgence mean "more uncertainty" for the markets and more volatility in the months to come.

Common elements of the "Trump trade" include betting big on banking, healthcare and energy stocks, as well as Bitcoin.

The president has been a vocal supporter of this cryptocurrency in recent months despite regularly referring to it as a "scam" as recently as a few years ago.

Trump is due to appear at the Bitcoin 2024 conference in Nashville later this week—an event that is likely to accelerate donations from deep-pocketed crypto investors.

As the odds surrounding who will be America's next president continue to shift in the coming months, so too will the markets.

If Trump's chances improve, shares in smaller banks could enjoy an uptick in value, while U.S.-listed companies that generate most of their revenue from overseas could suffer.

Both the Dow and the S&P 500 ended trading on Monday higher in response to Biden's withdrawal.